One of the biggest lies in recent times is that inflation is good and necessary for a healthy economy. Suggest that inflation actually signals the opposite and the fashionable but deluded response usually entails a comment about how things would come to a screeching halt if there were no inflation. While this is aggravating, what’s worse is that it illuminates the acceptance of the even more insidious lie that money ought to be controlled by a central authority.
The reality is that what money is ought to be decided by everyone who agrees to use it. And when I mean everyone, I mean every single individual must agree on what money is for it to be in good moral standing. This consensus is not to be confused with a majority rules system; for a change in the monetary standard to be ethically permissible, every single person participating in that standard must be on the same page.
The fiat system has made this concept difficult to grasp, so let’s consider how the previous hard monetary standard, gold, was arranged. Gold was denominated in units of weight, such as ounces, and was minted into coins for ease in exchange. The minters put special markings on their coins to signal to users that the weight of gold denoted on the coins could be trusted because of their reputation of being honest and forthright. Since it was the amount of gold in the coin that mattered in determining its monetary value and not so much the other features of the coin, if people discovered that the coins were clipped, they would naturally trade those coins at an appropriate discount until they were melted down and reminted honestly.
In many cases, the prince or other governing authority was entrusted with these minting duties. But despite being the ruler of the land, he was not meant to also have dominion over the money he minted. In his treatise on money, De Moneta, Nicholas Oresme made this point abundantly clear in Chapter VI, “Who owns the Money?” Oresme wrote:
Although it is the duty of the prince to put his stamp on the money for the common good, he is not the lord or owner of the money current in his principality. For money is a balancing instrument for the exchange of natural wealth, as appears in Chapter I. It is therefore the property of those who possess such wealth. For if a man gives bread or bodily labor in exchange for money, the money he receives is as much his as the bread or bodily labor of which is (unless he were a slave) was free to dispose. For it was not to princes alone that God gave freedom to possess property, but to our first parents and all their offspring, as it is in Genesis. Money, therefore, does not belong to the prince alone.
When you frame money the way Oresme does, that it is “artificial riches” and that it “does not directly relieve the necessities of life, but is an instrument artificially invented for the easier exchange of natural riches,” it starts to make more sense why changes must be agreed to by all. If the members of a society agree that gold is money, then the additional supply of money only occurs when natural riches are first created in the economy. Anyone is free to try to go out and find gold, but as it continues to be mined, it becomes more difficult to find. It is only the increase in the value of gold that incentivizes the expenditure of resources to search for more. Unless on the off chance that a massive vein of gold is discovered, this market process ensures a stable if not steadily increasing purchasing power of the gold money. The increase in supply of the gold helps it to be distributed across the economy without it becoming so value-dense that divisibility becomes an issue.
As a result of all of this, the gold becomes a reliable tool for transporting value across time and space for managing uncertainty.
Imagine Alice mixes her labor with some flour, water, yeast, and heat to bake a loaf of bread and as a result adds value to society. Bob deems that addition of value to be worthy of 1 ounce of gold and trades that gold for Alice’s bread. Alice can then hold that ounce of gold until she finds a trading partner to exchange it for the natural riches she wants to use. In the meantime, what happens if Chuck decides to add some counterfeit gold that goes undetected as fake to the money supply? The value of Alice’s ounce of gold will be diluted and she will be impoverished as a result. She has no incentive to want Chuck to add counterfeit gold to the supply that only he benefits from at the expense of her and everyone else’s diminishing wealth. If Chuck and others did a lot of this, it could have disastrous effects on the economy. They wouldn’t be bound to the normal market conditions that require work before new supply is added to the money stock.
Unfortunately for this monetary system, gold has flaws whose systematic exploitation brought us to the fiat system that we have today. Gold has properties that required centralization to better leverage its usefulness as money and that centralization ultimately resulted in a transition from gold money to gold-backed money certificates to unbacked paper money. Under this paper money fiat system, central banks and governments work together to add new supply to the economy and take full advantage of the seigniorage. Of course, they do this without any explicit consent whatsoever from the people whom they force to use their money.
The obvious and demonstrated result of such a fiat system is high inflation. Given a free market that allows for competition among currencies to be used as money, Thiers’ law informs us that people will choose the appreciating one to the depreciating one. Payment would be demanded in the harder currency and a premium constantly increasing to infinity would be required for payment in the easier currency until it simply was no longer accepted.
So if people wouldn’t be incentivized in the market to choose this money, how can we have this fiat system? Legal tender laws force people to use the government’s fiat through the threat of violence. But this threat of violence can only get governments so far—heavy-handedness can easily breed contempt and stir up negative emotions. A much more effective way of gaining cooperation is to trick people into believing that the fiat system is the best thing out there. Inflation is sold as good and important and the consequential rise in prices across the economy is cleverly referred to as an “adjustment in the cost of living.” People are told of how they now have access to cheaper credit and can finance the purchase of things they never could buy before. They’re told that consumption is what drives the economy and savings are decried as selfish.
But what’s never explained to anyone is the cost of all of this. Those being enriched by the fiat system don’t want you to know that their control of the money system is the ultimate case of the fox guarding the henhouse. Of course they want you to believe that while maybe they’re enjoying some benefits from this system, it’s really all of you who get the most out of it.
When new money is added to the economy, it benefits those closest to the money spigots, the government. The government can use this new money before the rest of the economy feels the effect of the loss of purchasing power resulting from the increased supply. The first to use the new money can spend it as if the supply hasn’t been increased since that information is not yet well known through a change in prices. As the money flows the economy, the prices adjust upward and those with the smallest amounts of money are hurt the most. Who would choose such a system where their money would be worth less tomorrow than it is today?
Fortunately, Bitcoin returns us to a system where money is agreed upon by all by making it considerably harder for someone to rig the game to steal value from others. Running a full node allows you to fully validate all new supply added to Bitcoin’s stock and check that all transactions follow the rules. If someone wants to change a parameter in Bitcoin, they must first convince everyone else who runs a node to change their software to be in consensus with the new ruleset. This ensures that no one is extracting value from someone else without their prior consent.
This is an ideal system because while there is plenty of money to be made by adding new bitcoins to the supply, cheating will quickly leave you nothing to show for your work in mining the next block when it is effortlessly rejected by the node operators. Bitcoin helps us to rediscover what was known by everyone during the time of Oresme: that we should view those who violate the property rights of the owners of money as the thieves that they are.
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